Economic Incentives for Financial and Residential Independence

In this paper we examine the impact of the resources of children and of their parents on the children's transition to residential and financial independence. Previous studies of this transition focused primarily on the impact of family structure and parent-child relationships on the decision to leave home, but much less is known about the role of economic factors in the transition to independence. Using data from the Panel Study of Income Dynamics (PSID) for the period 1968-1988, we estimate discrete-hazard models of the probability of achieving residential and financial independence. We find that the child's wage opportunities and the parents' income are important determinants of establishing independence. The effect of parental income changes with the child's age. We also find some evidence that federal tax policy influences the decision to become independent, although the magnitude of this effect is quite small.